Asia Coal-China demand in focus as power shortages loom

PERTH, June 2 Thu Jun 2, 2011 6:35am EDT

PERTH, June 2 (Reuters) - Asia's thermal coal markets were focused on Chinese demand as the world's largest coal consumer faces what is expected to be the worst power shortage in years.

Chinese buyers have been in the market for both Indonesian and Australian coal as domestic prices in the world's largest coal producing country have shot up.

But Australia's thermal coal prices, a benchmark for Asia, were still slightly lower on the week with the globalCOAL Newcastle index closing at $118.86 on Wednesday, a dollar down from a week ago.

China's daily prices for coal with a heating value of 5,500 kcal/kg NAR were 845 yuan ($130.43) per tonne on Thursday, according to industry data website SXCOAL (www.sxcoal.com).

"Because everybody else has secured their requirements right now, everybody is focused on what incremental prices China is willing to pay for lower-calorific Indonesian and the tailings and washings out of Australia," one Singapore-based source said, referring to Newcastle coal which does not meet the standard export specifications.

China said on Wednesday that it would encourage imports, which typically only enter the country when China's domestic coal prices are high enough to make economic sense.

Chinese demand for Indonesian coal, however, was seen slightly lower during the past week.

"They have bought quite enough low-grade coal from Indonesia- now they are trying to find some higher-grade coal to blend. Australia is the most economical source," another Singapore-based market source said.

Most recently, Chinese buyers secured a cargo of 4,900 kcal/kg Indonesian coal for $89 per tonne FOB, a couple of dollars cheaper than deals done late last week, the source said.

WEEK AHEAD

Japan's coal demand outlook will also be in focus, with Xstrata , the world's largest exporter of thermal coal, visiting Japan next week to negotiate an annual supply contract beginning July 1.

Although the supply contract beginning in July is for far less tonnage than the April contract, which serves as a yearly price benchmark, the negotiations may provide an indication for how well utilities are recovering from the March 11 earthquake.

Major utilities Tokyo Electric Power and Tohoku Electric were forced to declare force majeure on some coal shipments after some power plants were knocked offline due to the earthquake and tsunami.

A Sydney-based trader said the settlement price for the July contract may be similar to April's price of $129.85 per tonne, but others disagreed, saying lower demand due to the Japanese earthquake would depress prices.

"I wouldn't be surprised if they settle at $125 per tonne," one trade source said. ($1 = 6.479 Chinese Renminbis)

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